Monday, June 06, 2005

The mattress problem, and other consumer woes

In the early days of e-commerce, oh so many years ago, there was much talk about the Internet's ability to foster what’s sometimes called “perfect pricing.”

The idea was that the Internet could approach the ideal of a perfectly functioning market, where everybody has complete information, the invisible hand works its magic, and profit is reduced to the barest minimum – just enough, presumably, to provide incentive for producers to produce instead of giving up and fleeing to the Bahamas with last year's earnings.

Even Bill Gates weighed in on the subject, arguing in his 1995 book, The Road Ahead, that the Internet would lead to “friction-free capitalism,” where buyers and sellers would cut out the middleman, markets would function with maximum efficiency, and consumers would reap the rewards. Some contrarians wondered if capitalism could actually survive perfect pricing, if it ever materialized on a wide scale, but those heady days were tough times for skeptics.

Well, guess what? It never happened.

The closest we’ve come is eBay, where buyers and sellers, in theory, negotiate directly. EBay isn’t always what it seems – it has suffered from the problem of shill bidders, and from the fact that individual sellers can be hard to distinguish from big businesses – but, at its best, it operates like a nationwide bazaar.

Elsewhere, most sellers still know far more than most buyers, and can use that knowledge to keep consumers off balance. And one technique that has moved online quite happily is what Joe Turow would call "the mattress problem."

Ever try to comparison shop for mattresses? You've probably noticed what Turow has: Manufacturers and retailers go out of their way to dodge head-to-head price and quality comparisons. It’s rarely apples to apples, or even to oranges. Sometimes it’s more like apples to begonias.

Internet marketers have adopted that tactic, says Turow, a professor at the University of Pennsylvania’s Annenberg School for Communication. Many now offer their best deals in forms, such as travel packages, that defy straight-up comparisons.

But that's not the only impediment to perfect, friction-free e-commerce, or even the biggest one. According to a new study by Turow and two grad students, some marketers are using the Internet's advantages to sharpen their edge against customers who'll never know what's hit them.

Turow's study (to see it, click here) reveals widespread consumer ignorance about how personal and financial data are bought and sold nowadays. Nor do consumers understand “price discrimination” – the practice, online or offline, of giving different prices to different people in differing circumstances, sometimes based on that personal information.

In case you're wondering, price discrimination is perfectly legal, as long as a seller doesn’t discriminate against a “protected class,” such as by charging more to Asian people or Anglicans. Benign examples abound, such as senior-citizen discounts, or doctors’ charging less to the poor. So do cases where businesses openly use leverage – as when airlines, for instance, charge more to those who make last-minute plans.

But Turow believes that a more insidious form of price discrimination has emerged from the Internet's capacity to present individual buyers with customized prices.

With so much data for sale, businesses can easily profile our personal finances and habits. As a result, I might get one price while you get another, for reasons known only to the sellers and their computer programmers. Loyal customers may still get discounts, as they do at groceries that reward regular shoppers. But they also might get charged more – say, by a business that can identify those whose loyalty seems unshakable – without ever even noticing.

It's a crafty, smart practice that many consumers would abhor if they knew about it. It's made possible by our extremely loose laws on the privacy of most personal data.

The one thing it isn't is “perfect pricing” – unless the perfection you’re talking about is a business' ability to charge every customer what his or her pocketbook and attention span will bear.


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